Why (& How) You Should Talk To Your Teen About Tax Season
Talking to your teen about money is one of the best things you can do for them—and tax season is as good a time as any to start that conversation. A study by Raddon found that even though today's teens are 3x more likely to have taken a financial literacy course than millennials, 84% of Gen Zers also rely on their families for financial information. Becky Ward, Educational Experience Specialist at Tutor Doctor, believes having an open dialogue with your teens about finances will give them the knowledge and experience needed to make their own financial decisions.
"It's really important for parents to remember that money management, whether that just be through managing their day-to-day money, taxes...it's a life skill. Just like you would want to build any other life skill in your child, you want to build their financial literacy," Ward tells Parents. Here are Ward's top tips on how to talk to your teens about this time of year—and other money lessons.
Explain why we pay taxes.
Kids experience taxes way before they start working—the first time they buy something, for example. Ward suggests that this is a great opportunity to start the conversation early because a kid might be wondering why an item is more expensive than they thought it would be. Explain what sales tax is, how much it is, and why we have it.
"Starting off with something small like that, you can just make it part of general conversation. By the time your teen gets their first job, they're going to be paying income tax. So you're definitely going to want to give them a heads up on that before they get their first paycheck and find it smaller than what they expected," says Ward.
Talk to them about what income tax is, the different types of deductions, and what that money is used for—like medical care, a federal return fund, or employment insurance. It is also important to talk to your teen about the different types of income that they will be taxed on. For example, if they work in the service industry and get tips, they will be taxed on that. Also talk to them about things they will not be taxed on, such as a college scholarship. "If you understand what taxes are, what you're going to have to pay taxes on, what you're eligible for deductions wise, you're more likely to prepare yourself throughout the year for that," says Ward on the importance of teaching your teens about taxes.
If your teen is working, have them file a tax return. For the current tax year, minors have to file a tax return if they earn over $1,100 or if the sum of their wages plus $350 exceeds that number, according to TurboTax. Even if they earned under $1,100, if their employee withheld taxes from their paycheck, they would have to file a return to get a refund. "I think what it boils down to is taxes and money management are something they have to do for their whole life. If you have a good grasp on it, you're more likely to do it more wisely," says Ward.
Have an open, ongoing dialogue about money.
When you talk to your teens about money, try not to make it a lecture. "Teens especially are very attuned to when they feel that they're being lectured," Ward explains. "They're just going to shut down. It's better to just have small conversations here and there, with kids of any age."
Instead of a lecture, give kids financial guidance in small, digestible pieces as they go through life. Take them to the bank with you, or call them over when you're writing or depositing a check (this can be digitally if your bank has that option). Ward also suggests including your teen(s) and even your younger children in your family budgeting. A good place to start, according to Ward, is your groceries. Take kids shopping with you to help them learn how to stick to the budget.
If and when your teen gets their first car, "involve them in some of those decision-making processes," Ward suggests, although she emphasizes that as the parent, "ultimately, you have the final decision power. But get them involved in researching different insurance companies—where are they eligible for discounts, how much are the rates going to be. You can do the same with a cell phone plan."
Part of having an open dialogue about money is being honest. Many parents are facing financial hardships from this past year, and while your instinct might be to protect your kids from that, Ward believes it's a good idea to let them in on some of the realities of your family's finances. Ward uses her own family as an example; she regularly tells her kids (who are not yet teens), "We can't afford it," since her husband got laid off due to the pandemic. In doing so, Ward explains she's "being honest with them and allowing them to see the realities of how money impacts daily life. I think it helps them to understand how it works."
Ward also says that when you're talking to your teens about taxes or money management, it is important to relate it back to something they can understand. When her older son asked her for a big-budget item he wanted, Ward broke it down for him and explained the number of hours she would have to work in order to afford it and whether that was a smart use of time.
"They see me sitting at my computer and working, and they understand what that looks like. So by relating it back to that, they have a better grasp of where that money comes from and where it's best utilized," explained Ward. "It allows them to see that money isn't infinite. And it allows them to see it's something that you have to work for."
Open a savings account.
Another big part of talking to your teens about money, beyond tax season, is teach them about saving options. Tax-free savings accounts, education savings plans, and retirement savings plans are all important options to discuss. "If you start saving for your retirement when you're 18, think of the impact that's going to have on you when you're 70," says Ward.
Learning about saving while they are still living at home can really set your teens up for financial success later. "It helps them to develop good saving habits when they're just starting to earn money. By instilling those habits in them when they first start earning, it becomes something that is much more manageable to continue throughout their career and throughout their adulthood," Ward adds.
Another pro tip: Open a bank account with your child, and do it early. When is "early"? "As soon as they start earning money," Ward recommends. Opening up a bank account for your child when they're actively spending allowance money helps them understand how to save better and work toward any financial goals you set together. "Teens should absolutely have a bank account, especially if they're going to be looking for any kind of job," says Ward.
There are also apps that help you keep track of your family's finances and help teach your kids about managing their money. Ward recommends something like FamZoo, which allows you to release funds to your kids through pre-paid cards. There is also BusyKid, a chore payment app where you can pay your kids on a set date each week for doing their chores.
Along with opening up a bank account, Ward also suggests talking to your child about interest. Explain to them how they are going to actually make money by keeping their money in a savings account. And talk about how, if they spend money they don't actually have with a credit card, they will have to pay interest on that. "The income from saving, and the cost of borrowing is really important... I know many teens get their first credit card and are surprised that there is a cost to borrowing," says Ward.